Trump says Iran war "close to over" amid hopes for more negotiations
A sharp reversal in energy prices may have flipped the script for AUD/NZD, with a bearish key reversal suggesting the balance of risks is starting to tilt lower.
- Failed break above 1.1250, bearish key reversal prints
- Energy drop reverses Australia’s terms of trade tailwind
- Short setups may be on the menu if energy weakness holds
Summary
AUD/NZD printed a bearish key reversal on Wednesday after failing to hold a break above 1.1250, rejecting fresh highs following a prolonged uptrend and hinting momentum may be stalling. While the RBNZ’s hawkish shift helped underpin the kiwi, the bigger driver was perhaps the sharp drop in energy prices following the Iran ceasefire extension, reversing the positive terms of trade shock Australia had been enjoying relative to New Zealand. If that shift in energy holds, a short setup may be on the menu.
Key Reversal After Failed Breakout
Source: TradingView
While the AUD/NZD cross may not be the most exciting pair, it is a reliable trending market for swing traders to look at. One glance at the chart shows how respectful it is of trends and historical levels, making it ideal for those with patience who let the price action come to them. It also means the key bearish reversal candle that printed on Wednesday, in an otherwise chaotic session for market noise, may actually prove to be a reliable signal.
It came after a prolonged uptrend and followed a failed breakout above 1.2150, a level that has acted as both support and resistance over several years, strengthening its merits. However, follow-up price action will be important for confirmation, especially as it goes against the prevailing bullish trend.
The oscillators are not yet screaming sell, with RSI (14) pushing lower but remaining above the neutral 50 level. MACD may soon cross the signal line from above, but it too sits comfortably in positive territory. The overall message is one of waning topside strength, more a warning to bulls about chasing further gains rather than giving the green light to bears to hammer the bid.
For those new to the pair, it has a tendency to gravitate towards big figures and half big figures, so keep that in mind when considering setups, targets and stop placement.
Shorts May Be on the Menu
Should the bearish signal prove reliable, 1.1950 looms as the first downside target for shorts, with a break beneath that level important as it would snap the sequence of higher lows going back months. If that were to occur, the 50DMA and 1.1797 are the next downside targets of note. Of course, if the signal proves false, the prevailing trend suggests reverting to buying dips may end up being the smarter play.
Oil Drop Undermines AUD Tailwind
The correlation matrix reinforces that the macro story here is about energy, not rates. Based on the strength of the positive relationship AUD/NZD has with Brent and natural gas futures, proxied here via the Henry Hub front-month contract on the CME, the outlook for energy prices looks critical when assessing the likelihood of bearish setups.
Source: TradingView
Just look at the scores over the past week. Correlations with Brent and natural gas sit at 0.87 and 0.89, respectively, a very tight relationship that aligns with the price action. Contrast that with two-year yield differentials and longer-term spreads between Australia and New Zealand, which have been negative over the same period, a relationship completely at odds with what the price has been doing. If rate differentials were driving the pair, you’d expect the exact opposite.
While there have also been extreme correlations with VIX and S&P 500 futures, that too largely reflects shifts in energy markets, which have been driving broader sentiment. Australia is a major energy exporter, unlike New Zealand, meaning higher prices generate a positive terms of trade shock for one but not the other.
While rates may eventually return to the driving seat, for now, directional risks for AUD/NZD look tied to energy markets, and by extension, the outcome of the Iran war ceasefire. If it falls apart, the pair may well reverse higher. If it holds, this could be the start of a new bearish trend.